A Sense Of Confidence Prevails On Wall Street

December 07, 1992|By Mike Dorning, Chicago Tribune.

BOCA RATON, FLA. — The rest of the country may have voted for change, but for Wall Street things look pretty good the way they are.

As lethargic as the nation`s economy may seem to the untrained eye, low interest rates have been the impetus for massive migrations of money. And the nation`s stock brokerages and investment banks have been acting like toll collectors every stop along the way.

Money has been flowing out of certificates of deposit for nearly two years and into brokerage products such as bonds, stocks and mutual funds, in search of an improvement on the miserly interest rates available at banks. Some $51 billion poured out of CDs in the first six months of this year alone.

At the same time, companies have been drawing in low-cost funds through new bond issues and stock offerings in order to pay off old debts secured at interest rates that now seem another example of 1980s` excess.

Those companies pay fees to Wall Street`s investment bankers, who underwrite the new securities. Then, holders of the old bonds-which suddenly have a lump sum of cash-pay the brokers commissions to reinvest their unexpectedly early proceeds.

The net result has been, after several lean years, record $5.8 billion pretax profits for the securities industry in 1991 and a pace this year that appears likely to beat that figure by a billion dollars, according to the Securities Industry Association.

Securities houses, which laid off 53,000 workers in the 3 1/2 years after the 1987 stock market crash, have been hiring since the Persian Gulf war. The firms have added 17,000 employees in the last 18 months, a modest expansion symptomatic of Wall Street`s rediscovered caution, but still notable in a period when joblessness was growing.

The industry`s leaders, on their annual retreat last week at a private Florida resort, were able to hit the golf course and tennis courts with a sense of confidence about the year ahead.

``Whether we`ll have another absolute record year or not in 1993 is hard to tell, but we`ll do well,`` said John Steffens, executive vice president of Merrill Lynch & Co.

The movement of wealth fostered by low interest rates is far from complete. Money has a certain inertia: It takes time for people to adjust to new financial circumstances, and investments like CDs must reach their maturity before they can easily be switched.

The securities executives gain added cheer from signs that the economy is solidifying and that expanding businesses will turn to them to raise money on the financial markets. Corporate profits, the fundamental underpinning of stock values, also are on the rise. And consumer confidence is finally perking up; optimists, brokers know well, are more likely to put their money in the stock market.

The only potential cloud in the forecast on the Boca Raton beaches was the possibility that President-elect Bill Clinton would engage in a large deficit-spending program to stimulate the economy. If such a program were to provoke fears of inflation, it would raise interest rates. Then the money migration could halt or even switch directions, so that the dollars would flow away from brokerages and back into bank accounts.

The brokerage community, however, showed little anxiety about Clinton. The golden saxophone pin on the lapel of one industry lobbyist didn`t even seem out of place in the traditionally Republican crowd.

They use words like ``smart`` and ``willing to listen`` to describe Clinton. They are reassured by his cautious record as governor of Arkansas, despite campaign promises of fiscal stimulus. They also have been soothed by comments from Clinton`s economic advisers that recent improvements in economic statistics are reasons to scale back a fiscal package.

``Clinton is not frightening. He has a history of being pro-business in Arkansas,`` said Thomas James, chairman of Raymond James Financial, a regional brokerage based in St. Petersburg, Fla.

James puts the risk of a Clinton-induced spike in interest rates next year at 25 percent-``significant, but not large.``

The direction of any fiscal package Clinton introduces is likely to provide some benefit to securities houses. The president-elect has said he would focus on infrastructure projects to improve roads, rail lines and airports. Such projects usually require a matching contribution from local governments, which raise the money with bonds underwritten by securities dealers.

The confidence about their short-term future is allowing many in the securities business to concentrate on the industry`s long-term prospects.

The 1990s do not appear destined to match Wall Street`s giddy `80s, but a generational change in American demographics will allow brokers a chance for a steady increase in their customer base.

The Baby Boom peaked in 1957, and most Baby Boomers are now older than 35, noted Abby Joseph-Cohen, co-chairman of the investment policy committee for Goldman, Sachs & Co.

``When the head of household hits his mid-30s, the rate of savings goes up dramatically. When the head of household hits his 40s, he saves for different things: instead of a house down payment or next year`s summer vacation, long-term goals like a child`s education,`` Joseph-Cohen said.

By Joseph-Cohen`s analysis-one shared by many in the investment community-the pool of savings will rise in the years ahead and the proportion of it directed toward securities dealers will grow. Stocks, mutual funds and bonds have historically been the place investors put their money when they are saving for distant goals.

Enlarging the impact of that demographic shift is a public losing confidence in the Social Security system and so more conscious of the need to set aside money for retirement.

The result is a Wall Street that no longer swaggers but perhaps has a skip in its step.